The situation in North Korea has dominated headlines in recent days and while the war of words has intensified and become center stage for the news and investment media, we thought it would be helpful to look at market reaction to historical events to place this in proper context.
This chart shows the market reaction to different historical events over the past 60 years. It is worth noting that investors typically have a “knee jerk” response immediately after these events as they try to incorporate the news and the higher risk scenarios in their portfolio. In the majority of these instances, the initial reaction to reduce risk (sell) proves to be a false red flag, and as evidenced by the chart above, more often than not the initial loss is made up within a few months and significantly higher a year later. The average first day “response” was -3.0% but 4 months later the average return was 2.1% and one year later the average return from the first day was 4.1%. The differences are even greater when the event is viewed against the economic climate.
One of the main things to look at in analyzing these types of events are whether the event has the potential to disrupt the underlying economic growth engine, and more importantly, where we are in the overall economic growth cycle and how this effects corporate earnings. For example, the 1973 oil embargo event was not initially seen as a market mover, but it affected the entire US and world economy, whereas the 1987 Crash was much more severe initially, but it was due more to internal market forces and did not really have an effect on the overall economy. Individual events, such as the current North Korea “crisis” will tend to be short lived and have a quicker recovery time depending upon the state of the economy and earnings growth.
As for earnings growth, we are seeing very strong trends. For the second quarter, trailing 12-month earnings for the US was 9%, European growth was 34%, and Japan was 37%. More importantly, these growth figures are reversing a declining trend going back to 2015. Using that as a backdrop in order to see the current event should be very instructive and reinforces our view that this does not change anything in our investment theme and represents a buying opportunity for new investment.
In conclusion, we do not see this as an event worthy of a change in our investment stance. Obviously, we will be monitoring the situation going forward and if future developments lead us to a different conclusion, we will communicate what changes that will entail.
As always, if you have any questions or would like further information, please contact us.